Before we delve into the fundamentals of value, it is important to make a distinction between value and price.
Value and price are used interchangeably especially in the context of fund raising where pre money valuation is mis construed as valuation of the biotech/medtech assets.
Pre-money valuation as seen by business angels/ VCs are based on supply and demand. If too many VCs chase a life sciences company, the price of the asset automatically rises and vice versa.
To understand, how to negotiate the price with the investors, please visit https://labiotech.eu/features/value-negotiation-biotech-price/
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Companies create value by investing capital to generate cash flows in the future at a rate of return greater than the cost of capital. This fundamental or Intrinsic value is based on risks, growth and cash flows of the company. Put simply, anything that doesn’t increase the cash flows cannot create value.
The biggest challenge in valuing an early stage asset is how we could project the future cash flows with many uncertainties where the risks are discrete and the products could fail in any phase.
It is important to note that a good valuation is a mix of right narratives backed by numbers. The narratives also need to be test driven before it becomes a fairy tale to the audience.
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